In May 2016, we launched the Expanding Prosperity Impact Collaborative (EPIC). The initiative grew out of a recognition that the financial challenges facing Americans today are evolving in an increasingly complex, unpredictable economy and labor market. More than ever, there is need to shine a light on these challenges and the ways in which they undermine household financial security. The ultimate goal of each EPIC round is to build leadership committed to identify and implement solutions that will improve the financial lives of millions of people.
In its inaugural year, EPIC focused on income volatility. Over the course of an 18-month cycle with the issue, we learned that individuals and households use an ad hoc patchwork of strategies to manage dips in income and spikes in expenses, that households often rely on credit to get by, and that few households have sufficient savings to manage unexpected expenses. We also learned that for low-income families, the combination of income and expense volatility, in addition to limited access to credit, can create serious barriers in achieving some semblance of day to day financial stability. This inability to meet basic needs with income from labor, transfers, and other sources makes it difficult to maintain long-term savings, and more pressingly, emergency savings. Households bank heavily on borrowing and many are pushed into debt. Moreover, these same households often rely on more expensive and higher-risk forms of debt, such as payday loans, subprime auto loans, and private student loans.
Income volatility taught us that the debt individuals and families take on during times of hardship snowballs overtime to create what often feels like an inescapable, suffocating financial burden.
This is how, and why, we chose our next topic: consumer debt.
What we know so far
US households deleveraged aggressively during and after the Great Recession, but aggregate debt rose rapidly between 2013 and 2016. In 2017, total household debt reached $12.84 trillion, finally surpassing its 2008 peak. Education and auto loans have surged over the past decade, even as mortgage debt has remained below 2008 levels. While credit card and mortgage delinquency rates are below their historical averages, delinquency is an increasingly serious problem in the student loan and auto loan markets. Additionally, nearly one in four Americans under age 65 have medical debt, and one-third of US consumer credit reports contain information about one or more debts in collections.
Low-income households face an additional set of challenges. Credit card debt is equivalent to 18% of income for the average family in the bottom income quintile, requiring $677 in annual interest payments from those with annual incomes under $22,000 – a devastating reality that becomes even more alarming when reminded that over half of Americans do have less than $500 in liquid savings.
What we hope to uncover
Like our process with income volatility, we will spend the next 18-24 months conducting a comprehensive investigation of the drivers, features, and consequences of consumer debt. Our Financial Security Program’s Senior Fellows and EPIC advisors Ray Boshara and Tim Odgen like to remind us that context matters a lot – especially with this issue. As we dig deeper in attempting to answer our key questions about consumer debt, some of which are listed below, we will do our best to layer in context and perspectives that push this process to be both productive and provocative. In doing so, we hope to end up with solutions that can positively impact the lives of individuals and families struggling across the US.
Our key questions
- What are the drivers of rising consumer debt today?
- What are the relationships between income volatility and consumer debt? How does experiencing volatility impact workers’ and families’ level of debt and ability to manage debt successfully?
- What are the sets of credit products that families frequently access and use to manage their finances? Are certain combinations—or limited access to the full range of products—associated with financial distress?
- To what degree is the changing composition of consumer debt (specifically, the rise in auto and student loans and decline in mortgage borrowing among young adults) affecting households’ ability to maintain financial stability and to use debt to reach their long-term goals?
- Does consumer debt have differential impacts on various demographic groups? How does this affect those groups’ financial security?
- What role does consumer debt play in the larger economy?
- Do consumers’ struggles to effectively manage debt impact their financial behavior to the point that there is an aggregate effect on the macroeconomy?
In addition to the work and support of our staff, each EPIC issue has a unique Advisory Group. The Advisory Group plays an integral role in the EPIC process, providing overall strategic guidance and feedback. Members are carefully selected for their expertise in the field and their diversity of thought. Their input and participation helps ensure that we have a level of dialogue and knowledge synthesis that is thorough and goes beyond usual sound bites.